Traditional or Roth IRA
An individual retirement account (IRA) is one of the simplest options with lower contribution limits. The main difference between a Traditional and a Roth IRA is how and when you get a tax break. With a Traditional IRA, you may be able to deduct your contributions from your taxable income, and withdrawals in retirement are taxed as ordinary income. Deductibility is dependent on income limits and if you or your spouse are covered by another retirement plan. With a Roth IRA, contributions are non-deductible and the ability to contribute is phased out for higher incomes. ROTH withdrawals in retirement are tax-free. Each IRA has its own rules for early withdrawal penalties and minimum distribution requirements that should be reviewed carefully. The contribution limit is $6,500 in 2023 ($7,000 in 2024) with an additional $1,000 contribution limit if 50 or older.
Savings Incentive Match Plan for Employees (SIMPLE IRA Plan)
A SIMPLE IRA tends to be easy to maintain and allows self-employed individuals to contribute net earnings from self-employment up to $15,500 in 2023 ($16,000 in 2024) plus either a fixed 2% contribution or an additional 3% matching contribution from an employer. There is also an additional contribution limit of $3,500 if 50 or older. Contributions to a SIMPLE IRA are deductible, but distributions in retirement are taxed at ordinary rates. One disadvantage of this plan is the inability to rollover the funds to another plan within the first two years of participation. Like other IRAs, withdrawing funds before retirement age will mean paying a penalty of 10%—and 25% if it is within the first two years of participation. This plan is easy to set up with a bank or financial institution. Find more information here.
Simplified Employee Pension Plan (SEP IRA)
This plan works best for self-employed individuals who want to maximize their retirement contributions. You can contribute as much as 25% of net earnings from self-employment up to $66,000 in 2023 ($69,000 in 2024). Contributions are deductible up to the annual limit and distributions in retirement are taxed as ordinary income. One additional benefit of this plan is that a contribution does not need to be made each year. It is like an IRA in its flexibility and maintenance and the plan has low administrative costs and is easy to set up with a bank or financial institution. Withdrawals made before age 59 ½ may be subject to a 10% early withdrawal penalty.
This plan is similar to a traditional employer-sponsored 401(k) plan. Self-employed individuals may contribute to a Solo 401(k) with salary deferrals up to $22,500 in 2023 ($23,000 in 2024) plus an additional 25% of self-employment income. The total combined contribution cannot exceed $66,000 in 2023 ($69,000 in 2024). There is also an additional contribution limit of $7,500 for those 50 and older. Individuals can also choose to make either tax-deductible or post-tax deferral contributions. Solo 401K plans are best for those who expect to have higher self-employment income and want to maximize their retirement contributions. One of the benefits of this plan is that you are allowed to take out a loan without penalty. However, these plans can be more complex to maintain, and investment options may be more limited than in IRAs.
Defined benefit plan
This is a plan that promises a certain amount of income in retirement, based on a formula that considers your age, salary, and years of service. You can contribute as much as you need to fund your future benefit, which can be much higher than the limits for other plans. However, this plan is complex and expensive to set up and maintain, and it requires an actuary to calculate your contributions and benefits.
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